Update for February 19, 2016 – Severance Taxes in PA, a Mother Hubbard Dispute in TX, and a Note about Justice Scalia

The national and Marcellus rig counts are down from last week while the Utica rig count remained unchanged. Natural gas spot prices are generally down, and oil prices based on the Brent Crude and West Texas benchmarks hit new low points during the week before slightly rebounding. In Pennsylvania, things are relatively quiet this week. The Governor proposed a new severance tax, the Attorney General announced that she’s not seeking re-election, and a federal magistrate judge in Pennsylvania – in Scalia-esque fashion – rejected an attempt by plaintiffs to submit hundreds of new exhibits in a long-standing environmental dispute a week or so before trial. Elsewhere, the courts decided some interesting cases involving “lift gas” costs, free gas rights, the interpretation of the so-called “Mother Hubbard” clause, preemption issues, and the usual disputes over mineral ownership. Finally, the nation’s highest court lost Justice Scalia this week. We diverge briefly from the usual oil and gas law discussions to remember Justice Scalia by repeating a couple memorable quotes that sum up his legal writing style. Here’s your weekly update:

The Rig Count

The national rig count is down from last week to 541. (Source: BakerHughes).

The rig count in the Marcellus is down from last week to 29. (Source: BakerHughes).

The rig count in the Utica is unchanged from last week at 13. (Source: BakerHughes).

Commodity Prices

Natural gas spot prices at the Henry Hub are down from last week at $1.91/MMBtu as of 2/18/2016. (Source: EIA).

In the Marcellus and Utica region, spot prices are below the Henry Hub benchmark as of 2/18/2016. At Dominion South in northwest Pennsylvania, spot prices are down at $1.36/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, prices are down at $1.32/MMBtu. NYMEX prices are down at $1.942/MMBtu. (Source: EIA).

Oil prices are down from last week at $29.44/bbl as of 2/18/2016. (Source: EIA).

Developments in Appalachia

Like Lazarus, Talks of PA Severance Tax Rise Again. Undaunted by low commodity prices and a sluggish energy market in PA, Governor Wolf again proposed a severance tax for Pennsylvania. This time, the Governor proposes a 6.5% severance tax that he hopes will yield at least $220 million in revenue for the Commonwealth. The proposal boasts gross revenues in excess of $350 million, but that number will be offset by the payment of impact fees. Leading industry groups including the Marcellus Shale Coalition and the Pennsylvania Independent Oil and Gas Association derided the proposal as a threat to jobs in an already depressed market.

Governor’s Pipeline Task Force Issues Final Report. On February 18, 2016, the Governor’s Pipeline Infrastructure Task Force issued its lengthy final report that includes a number of prioritized recommendations along with a broader set of suggestions “to help Pennsylvania achieve responsible development of natural gas pipeline infrastructure in the Commonwealth.” The report also notes that various agencies will be assessing the recommendations over the coming months for possible implementation. Click here for a copy of the full report.

Federal Magistrate Judge in PA Slams Plaintiff’s Discovery Dump on the Eve of Trial in Environmental Case. Granting a motion to preclude plaintiffs from using hundreds of new exhibits submitted about a week before trial, Magistrate Judge Marty Carlson invoked his inner Scalia and rejected the plaintiffs’ late submissions, beginning the opinion like this: “In this litigation we are now presented with a sad and shocking spectacle, a debacle and dilemma which is entirely of the plaintiffs’ own making.” Ely v. Cabot Oil & Gas Corp., Docket No. 09-2284 (M.D. of Pa., Order Entered February 12, 2016).

PA AG Won’t Seek Re-election. Pennsylvania Attorney General Kathleen Kane, who made anti-oil-and-gas industry overtures during her first campaign, will not seek re-election after her term expires. As it relates to the oil and gas industry, the Attorney General raised eyebrows by bringing criminal proceedings against a well operator for alleged environmental crimes and investigating oil and gas royalty payments.

Oil and Gas Royalty Dispute Stays in WV Federal Court. On the heels of another flat-rate royalty dispute in West Virginia lateraled to the state’s highest court (Leggett v. EQT Production Company, No. 13-0004, 2016 WL 297714 (N.D. W. Va., January 22, 2016), the federal court this time denied a motion to remand a different dispute alleging that flat-rate postproduction costs are illegal in West Virginia, citing the defendant’s evidence that the value of the deductions constitute the amount in controversy and exceeded the $75,000 removal threshold. Kinney v. CNX Gas Co. LLC, No. 5:15-CV-160, 2016 WL 482075 (N.D. W. Va. Feb. 5, 2016).

Developments Beyond Appalachia

Operator Must Account and Pay for Lift Gas under Production Processing Agreement, Louisiana Court of Appeals Holds. Upholding a judgment north of $1 million, the court of appeals in Louisiana held that an operator had the obligation to account and pay for the percentage of “lift gas” from a well that it diverted and used as part of its processing operations and noted that the processing agreement lacked a provision that governed the use of (and reimbursement for) lift gas off the leased premises. Red Willow Offshore, LLC v. Palm Energy Offshore LLC, — So. 3d —-, No. 2015–CA–0512, 2016 WL 455825 (La. Ct. App., Feb. 3, 2016).

Property Description, “Mother Hubbard” Clause Fall Short in TX Dispute Over Mineral Deeds. Invoking the lessons of the J. Hiram Moore case (which folks might remember from their oil and gas class in law school), a court of appeals in Texas sent a dispute over mineral ownership back to the trial court for further evidence of the parties’ intent, pointing to an insufficient property description in the deed that could only be saved if the parties intended that a separate provision (which reads like a “Mother Hubbard” or “catchall” provision) really meant to convey everything in Harrison County to the grantee. Mueller v. Davis, — S.W.3d —-, No. 06-14-00100-CV, 2016 WL 433239 (Tex. Ct. App., Feb. 4, 2016).

No Early Appeal in Quirky TX Override Dispute. Citing a number of problems with a request to hear an interlocutory appeal, the court of appeals in Texas denied interim review of a trial court decision that a pipeline company had no interests in disputed overriding royalties that the company claimed to reserve in an assignment, concluding instead that the trial court had a number of fact issues to consider before the appeals court could rule on the legal issues. Armour Pipe Line Co. v. Sandel Energy, Inc., No. 14-16-00010-CV, 2016 WL 514229 (Tex. App., Feb. 9, 2016).

Sale of Oil and Gas Leases Moots Appeal Over Dispute to Provide Free Gas. Free gas clauses are typical in many leases, particularly older ones. However, lessees are sometimes skittish about continuing to provide free gas to landowners for safety reasons. In a case involving interesting appellate issues, the lessee notified a couple thousand surface owners that they should consider alternative energy sources for domestic use rather than the free gas the lessee provided due to drops in pressure from older wells and corresponding buildups of hydrogen sulfide. The class sued to keep their free gas service and prevailed. The lessee appealed but, in the interim, sold the leases at issue. The circuit court held that the sale mooted the appeals and declined to vacate the trial court’s orders such that the landowners are entitled to free gas and, presumably, the buyer of the leases is bound by that determination as successor to the appellant. Schell v. OXY USA Inc., — F.3d —-, No. 13-3297, 2016 WL 524110 (10th Cir. Feb. 9, 2016).

Pipeline Company’s Attack on Local Ordinance Banning Transport of Oil from Canada to Portland Harbor Survives City’s Motion to Dismiss. In yet another case involving local attempts to ban oil and natural gas development, a federal judge in Maine denied the City of South Portland’s attempt to dismiss a challenge to its local ordinance that effectively prohibited oil transports from Canada to Portland Harbor, concluding that the pipeline operator had standing to challenge the ordinance and rejecting the city’s contention that the claim wasn’t ripe for judicial review. Portland Pipe Line Corp. v. City of South Portland, Docket No. 2:15-CV-00054-JAW, 2016 WL 589857 (D. Me., Feb. 11, 2016).

No Reservation of Mineral Interest? No Problem in Kansas if there is a Mutual Mistake. In a dispute over mineral rights, the Kansas Court of Appeals held that sellers and buyers mistakenly omitted the sellers’ reservation of their mineral interests and upheld the trial court’s reformation of the deed, citing seller’s continued receipt of royalties and payment of taxes after the sale as evidence that they believed they owned the minerals while the buyers did nothing during that twelve-year period to stake out their claim. Although the sellers filed their claim to the mineral rights after the five-year statute of limitations, the appeals court concluded that the buyers’ long acquiescence equitably estopped them from using the statute of limitations as a defense to the sellers’ reformation claim. Chamberlain v. Schmidt, No. 112,667, 2016 WL 563003 (Kan. Ct. App., Feb. 12, 2016).

Justice Scalia…

We diverge for a moment from the usual oil and gas law discussions to remember Justice Scalia. Agree with him or not, Justice Scalia had a profound impact on the Supreme Court. He had an eloquent writing style and always entertained with his witty remarks, both written and oral. As the political world discusses how and when to replace the late Justice, we send along our thoughts and prayers to his family and pay a little tribute by sharing a couple of exemplary quotes that sum up his writing style:

On Law and Sausages. “This case, involving legal requirements for the content and labeling of meat products such as frankfurters, affords a rare opportunity to explore simultaneously both parts of Bismarck’s aphorism that ‘No man should see how laws or sausages are made.’” Community Nutrition Institute v. Block,749 F.2d 50 (D.C. Cir. 1984).

On Law and Golf. “It has been rendered the solemn duty of the Supreme Court of the United States, laid upon it by Congress in pursuance of the Federal Government’s power ‘to regulate Commerce with foreign Nations, and among the several States,’ to decide What Is Golf. I am sure that the Framers of the Constitution, aware of the 1457 edict of King James II of Scotland prohibiting golf because it interfered with the practice of archery, fully expected that sooner or later the paths of golf and government, the law and the links, would once again cross, and that the judges of this august Court would some day have to wrestle with that age-old jurisprudential question, for which their years of study in the law have so well prepared them: Is someone riding around a golf course from shot to shot really a golfer? The answer, we learn, is yes.The Court ultimately concludes, and it will henceforth be the Law of the Land, that walking is not a ‘fundamental’ aspect of golf.” PGA Tour, Inc. v. Martin, 532 U.S. 661 (2001) (Scalia, J., dissenting).

On Law and Fortune Cookies. “If, even as the price to be paid for a fifth vote, I ever joined an opinion for the Court that began: ‘The Constitution promises liberty to all within its reach, a liberty that includes certain specific rights that allow persons, within a lawful realm, to define and express their identity,’ I would hide my head in a bag. The Supreme Court of the United States has descended from the disciplined legal reasoning of John Marshall and Joseph Story to the mystical aphorisms of the fortune cookie.” Obergefell v. Hodges, 576 U.S. __, 135 S. Ct. 2071 (Scalia, J., dissenting).

Welcome to At the Well Weekly, a blog designed for busy folks in the oil and gas industry. If you haven’t read a thing during the week, our hope is that you can breeze through the update and be up to speed on the basics such as current rig counts, commodity prices, and case law updates on legal issues of interest in Appalachia and elsewhere.

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